Deregulation ushers in new era of commerce

3RD ANNIVERSARY OF THE PILOT SHANGHAI FREE TRADE ZONE

The pilot Shanghai Free Trade Zone marked its third anniversary on September 29, providing an opportunity to take stock of its achievements and its shortcomings.

Born amid great fanfare, the zone was designed as China’s testing ground for a new wave of market deregulation. Successes in the pilot project are set to be rolled out nationwide as part of policies to rejuvenate the world’s second-largest economy and open it wider to the world.

Starting from the scattered bonded areas of Waigaoqiao, Yangshan and Pudong International Airport, the size of the zone quadrupled in the last year to 121 square kilometers as its boundaries stretched to include the Lujiazui financial hub, the Jinqiao manufacturing zone and the Zhangjiang high-tech base.

Its impact has been impressive. The zone, which occupies only one-50th of Shanghai’s area, created one-fourth of the city’s gross domestic product in the first six months of this year.

Deregulation has included efforts to cut administrative red tape, reduce bureaucracy at customs, open up investment opportunities for foreign capital and liberalize control over financial flows.

Contracted foreign investment in the zone in the first half amounted to US$22.7 billion, or 46.1 percent of Shanghai’s total, according to municipal data.

Since its inception, the zone has resulted in 31 new customs rules that have shaved clearance times for imports by an average 78.5 percent and for exports, by 31.7 percent, according to Shanghai Customs.

The overall cost for customs clearance has been reduced by about 30 percent.

Such measures have helped facilitate trade. In the first eight months of this year, exports and imports in the zone totaled 754.6 billion yuan (US$113.2 billion), accounting for 42 percent of the city’s total. Some 14,000 trading companies have set up in the zone, bringing the number to 24,000.

Meanwhile, a new “negative list” specifying off-limit areas to foreign capital was set to roll out this month. It has been one of the most lauded achievements, replacing the former system of listing which limited areas were open and subjecting foreign investors to a complicated and time-consuming case-by-case approval process.

‘Negative list’

The number of areas on the “negative list” has been reduced from 190 in 2013 to 122 in 2015, allowing more room for foreign investors to come in and compete with domestic counterparts.

In terms of financial reform, multinational companies are now allowed to integrate their onshore cash pool in China with their offshore global treasury centers, and to conduct two-way automatic sweeping of the yuan. A free-trade account system has been put in place to facilitate cross-border financing and investment.

By the end of July, 45 financial institutions had opened 55,543 free-trade accounts with companies in the zone, a 144 percent increase from last year. Funds valued at 6.7 trillion yuan have been transferred via the accounts.

“Before companies were allowed to raise capital from overseas markets, lending interest rates generally fluctuated around the benchmark,” said Zhang Bo, assistant general manager of Baosteel Group Finance Co. “Since cross-border financing has become available, we have more room to negotiate funding costs and are able to choose the most appropriate financing, based on interest rates and the foreign-exchange rate environment.”

Despite the glowing report card, some facets of the Free Trade Zone have yet to achieve stated goals.

“Reform policies are actually good, but the problem lies in the implementation,” said Aaron Qian, general manager of a zone-based foreign investment consulting company.

The zone has announced a raft of measures to widen access to services sectors such as telecommunications, education, healthcare, travel, engineering design and international shipping management.

The zone’s regulator said earlier that all policies related to opening services sectors have been implemented.

“But the key is quantity,” Qian said. “In some sectors, there are only one or two companies being allowed to enter, which makes its unlikely for them to break any monopolies.”

Indeed, experts warned that the status of deregulatory reforms is at a fragile state.

Dereglatory reforms

“Numerous reform measures have been introduced in the past three years in various areas, but a lack of coordination between different departments has led to fragmentation and hindered reform efforts,” said Zhou Guoping, deputy director of the Development Research Center of the Shanghai Municipal Government.

For many foreign investors, the much touted priorities of the Shanghai zone’s reform agenda have failed to live up to lofty expectations because of the sluggish pace of change.

“Financial reform has been progressing slower than expected, largely due to yuan volatility and fear of capital flight in the past year,” said Qian Jun, professor of the Shanghai Advanced Institute of Finance.

China’s foreign reserves have fallen by US$460 billion since the central bank suddenly devalued the yuan by nearly 2 percent against the US dollar in August, sparking a flood of capital outflows.

Qian said capital flight is now under control and it’s time to put financial reforms back on active track.

“In the past three years, Shanghai’s Free Trade Zone has established a set of infrastructure policies, including the ‘negative list’ approach and the free-trade account system,” Qian said, “It’s like the ship has been built, and now it’s time to set sail.”